Basic reading
By Michale Hugos
Published by John Wiley& Sons, Inc.,
Hoboken, New Jersey, 2006

Is supply chain so simple?
Supplier Manufacturer Distributor Retailer Customer
Supplier Manufacturer Distributor Retailer Customer
Supplier Manufacturer Distributor
Upstream Downstream
Retailer Customer

Supply Chain of a Typical Original Equipment Manufacturer

Bullwhip Effect
§ Demand propagates from the lower levels of the supply chain
(consumer end) to the upper levels (supplier end).
§ Unfortunately, variability does the same and is amplified by each echelon of the chain. Terms for this include
§ Information distortion
§ Bullwhip Effect
§ Modest movement at the whip handle (representing consumer demand fluctuations) leads to wild swings at the whip’s tip
(demand experienced by the supplier). Bullwhip cracks are loud because of the Doppler effect (e.g. as seen visibly in a boat’s wake) which generates a small sonic boom as the whip tip breaks the sound barrier at about 800 mph. The supply chain bullwhip crack can be heard through bankruptcy filings as vulnerable suppliers and manufacturers experience deadly cash flow variability.

Because customer demand is rarely perfectly stable, businesses must forecast demand to properly position inventory and other resources. Forecasts are based on statistics, and they are rarely perfectly accurate.
Because forecast errors are a given, companies often carry an inventory buffer called " safety stock ". Moving up the supply chain from end-consumer to raw materials supplier, each supply chain participant has greater observed variation in demand and thus greater need for safety stock. In periods of rising demand, down-stream participants increase orders. In periods of falling demand, orders fall or stop to reduce inventory.
The effect is that variations are amplified as one moves upstream in the supply chain (further from the customer). This sequence of events is well simulated by the Beer Distribution Game which was developed by the MIT Sloan School of Management in the 1960s.

Bullwhip Effect
The magnification of variability in orders in the supplychain
Retailer’s Orders Wholesaler’s Orders Manufacturer’s Orders
A lot of retailers each with little variability in
Time Time
…can lead to greater variability for a fewer number of
Time
…can lead to even greater variability for a single manufacturer.

The Bullwhip Effect in action

The Bullwhip Effect

Causes of the Bullwhip Effect

Solutions ?

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.

Integration Model Cont.
Identify Critical Supply Chain Trading Partners
– Enable sale & delivery of end products to final customers
– Identifying primary trading partners allows the firm to concentrate on managing these links
Review & Establish Supply Chain Strategies regarding:
– Parts purchased & suppliers
– Shop layout & manufacturing processes
– Design of the products manufactured
– Mode of transportation
– Warranty & return services
– Employee training methods

Integration Model Cont.
Align SC Strategies with Key SC Process Objectives

Integration Model Cont.
Develop Internal Performance Measures for Key Processes
– Performance should be continuously measured w/metrics for each process.
– ERP systems support internal performance measures
– Firm is able to track progress for each of the key processes.
Assess & Improve Internal Integration of Key SC Processes. Internal integration requires:
– Empowered teams & cooperation across all functions
– Management support & resources
– ERP system
– an understanding of the internal supply chain

Integration Model Cont.
Develop SC Performance Measures for Key Processes
– Monitor the links with trading partners in the key SCM processes.
– Trading partners should monitor a number of costoriented measures averaged across the member firms for each of the key supply chain processes.
Assess & Improve External Process Integration & Performance
– Build, maintain & strengthen relationships
– Share information concerning:
• Sales, forecast information, new products, expansion plans, new processes, & new marketing campaigns process integration will enable firms to collaborate & share this information.

Along the Supply Chain Cont.
Lack of Supply Chain Visibility
Anonymous, “Survey Finds Manufacturers’ Supply Chains Come Up Short,” Logistics
Management 41, no. 9 (2002): 19-20.

The Beer Game
Orders
Delay Delay
Factory
Delay Delay
Distributor
Retailer
Delay Delay
Wholesaler
Delay Delay
Material

Bullwhip effect in the beer game

http://forio.com/nearbeer.htm

Root Beer Game - Supply Chain Management Simulation http://forio.com/simulation/harvard-root-beer-game-demo/